On Guard Against Early 2018 Momentum

If you happen to read and retain most of what I write, you’ll have noticed that toward the end of December, I increasingly mentioned that it wouldn’t be until the first full week in January (which is NEXT week) that we’d be more likely to see the first major move in bond market momentum for the year. My friends at BMO Capital Markets went a step further in a client note yesterday, saying we’re “still effectively in holiday trading mode, and will be for a couple more weeks.”

Whether it’s next week or a few weeks from now, it’s only a matter of time before we see what’s on traders’ minds for the start of 2018. Either way, we will almost certainly see a choosing of teams, and a clear, sustained move higher or lower.

The first few days of trading have given us more reason to worry about that move being toward higher rates. After failing to break back below a few key technical floors last week, yields have bounced off another technical level as of yesterday. The problem with these bounces is that they’re occurring at “floors” that just recently acted as ceilings. This pivot-step that turns ceilings into floors is a hallmark of negative technical momentum. In plain English, when rates break a ceiling and then fail to break it as a floor, it’s bad.

As the chart suggests, the dire implications can be taken with a grain of salt due to the still-light volume. Even when volume begins to pick-up, we’d also need to see an uptick in liquidity (“volume at any given price”) before reading too much into it.

In the chart, the rightmost candlestick is today’s early trading. Naturally, it would be nice to see yields return to challenge the upper yellow line. At the very least, we’d hope to avoid breaking above the late-December highs at 2.50.

MBS Pricing Snapshot

Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.